Accelerated Share Repurchase (ASR) Definition
An Accelerated Share Repurchase (ASR) is also known as an accelerated buyback. It is a method used by a corporation, usually a corporation that issue stocks to repurchase its stocks for specific purposes. When a corporation buys back a large number of stocks issued by them, it is called an accelerated share repurchase.
ASR entails that the corporation that wishes to buy back its shares or stocks enter a forward contract with an investment bank and pays cash (down payments) to the bank. Another way that an accelerated repurchase can occur is a situation in which an investment bank shares from clients or lenders and release or return the shares to them in the open market.
A Little More on What is Accelerated Share Repurchase – ASR
Corporations that engage in accelerated share repurchase do this for their own benefits. When a company desires to reacquire its shares which it had earlier sold or leased to an investment bank, it is an accelerated share repurchase or buyback. Accelerated share repurchase can either be done by entering a forward contract with an investment bank in which an upfront payment is made or by buying back sold shares or loaned shares in an open market. The risks of buy back are often transferred to an investment bank in exchange for a premium that the bank receives.
Example of an Accelerated Share Repurchase
This is an example of accelerated share repurchase; If Company A initiates a repurchase program, it can buy back all its shares that it has previously issued. In an accelerated share repurchase agreement, Company A can make an upfront payment of let’s say $200 million to an investment bank in exchange for millions of shares or stocks. If Company A wished to buy back 10.35 million shares, the upfront payment allows Company get a part of the amount shares and one the ASR is settled (the balance paid to the bank) Company A is entitled to the remaining number of shares. ASR method is a faster and less-risky approach of repurchasing shares.
Accounting for an ASR
As required under GAAP generally accepted accounting principles), if a corporation makes a forward contract agreement with an investment bank, the forward contract serves as an equity instrument. A corporation that makes an upfront payment to the investment bank collect some part of the shares, in a case where fluctuation in market price affects the value of the remaining shares, the investment bank will not be held liable. Rather, the corporation assumes the liability and incurs all the losses. Increase in the value of share amounts to account receivable by the company while in decline in price leads to account payable. Fluctuations in market value can either be positive (increase) or negative (fall), in any case, the company assumes both the receivable and payable.
Reference for “Accelerated Share Repurchase – ASR”
Academics research on “Accelerated Share Repurchase – ASR”
Accelerated share repurchases, Bargeron, L., Kulchania, M., & Thomas, S. (2011). Accelerated share repurchases. Journal of Financial Economics, 101(1), 69-89. The article investigates whether a firms decisions to include Accelerated Share Repurchases (ASRs) in their repurchase programs are related with factors anticipated to influence the costs of lost flexibility and the advantages of improved credibility and proximity. ASRs are credible obligations by firms to repurchase shares directly. When ASR is included in a repurchase program, it decreases the flexibility that firms have to change an announced program in response to succeeding changes in the price and liquidity of its shares, unforeseen shocks to cash flow and or investments. Adequate evidence that is consistent with the costs of loss of flexibility and the benefits of credibility and immediacy was found to be of significance in the determination of ASR adoption.
Why do firms undertake accelerated share repurchase programs?, Chemmanur, T. J., Cheng, Y., & Zhang, T. (2010). Why do firms undertake accelerated share repurchase programs? The paper seeks to answer the question why firms would undertake accelerated share repurchase (ASR) programs. In recent years the ASR programs have increased in popularity as one of the innovative ways of repurchasing shares. The article thus examines the justification undertaking ASRs rather than the traditional open market repurchase (OMR) programs. Eight hypotheses regarding firms’ rationale for conducting ASR programs are then tested and incudes: the distribution of excess cash hypothesis, the target leverage-ratio hypothesis, the takeover avoidance hypothesis, the employee stock option dilution hypothesis, the managerial opportunism hypothesis, the liquidity reduction hypothesis, the EPS manipulation hypothesis, and the signaling or undervaluation hypothesis. From the study, it is evident that firms undertaking ASR programs are significantly larger than those undertaking OMR programs.
Accelerated share repurchases, bonus compensation, and CEO horizons, Marquardt, C. A., Tan, C., & Young, S. M. (2011, November). Accelerated share repurchases, bonus compensation, and CEO horizons. In 2012 Financial Markets & Corporate Governance Conference. The paper investigates whether short term financial reporting objectives connected to executive rewards and employment horizons affect mangers’ decisions to undertake accelerated share repurchases (ASRs) versus open market repurchases (OMRs). This system gives possible financial reporting advantages over OMRs in that earnings per share (EPS) benefits are recorded immediately while the actual share repurchases and potential costs associated with the forward contract are deferred to a future date. Firms are more likely to prefer ASRs over OMRs when the repurchase is accretive to EPS, when annual bonus reward is explicitly tied to EPS performance, when CEO horizons are short, and when CEOs are more entrenched. The findings are robust to controlling for endogeneity in the decision to repurchase shares. Generally, the findings postulates that short-term financial reporting benefits are a significant determinant of decisions to undertake ASRs.
The accounting and market consequences of accelerated share repurchases, Dickinson, V., Kimmel, P., & Warfield, T. (2012). The accounting and market consequences of accelerated share repurchases. Review of Accounting Studies, 17(1), 41-71. The article assesses the representational faithfulness of the accounting treatment of a recent and well-founded type of designed transaction –ASRs. Its popularity is attributed to its earnings per share which are recognized immediately, whereas any gains or losses on the forward contract used to execute an ASR bypass income, and are reported directly in equity. ERC tests denotes a market discount for the earnings of ASR companies compared with the control sample. The results indicate that the current accounting for ASRs does not result in representative reporting of these transactions. As a result, financial statement users might benefit from recognition of ASR elements in financial statements.
Accelerated Share Repurchase: pricing and execution strategy, Guéant, O., Pu, J., & Royer, G. (2015). Accelerated Share Repurchase: pricing and execution strategy. International Journal of Theoretical and Applied Finance, 18(03), 1550019. In this article, consideration is made on the best execution problem related to the Accelerated Share Repurchase (ASR) contracts. It highlights on the pricing and execution strategy and therefore, a model is provided, along with related numerical methods, to establish the best stopping time and the best buying strategy of the bank. The banks purchases the shares for the firm and is paid the average market price over the execution period, the duration of the period being decided upon by the bank during the buying process. Mathematically, the problem is new and related to both option pricing and optimal execution.